Order Code RL33274
Financing the U.S. Trade Deficit
Updated January 18, 2007
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

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Financing the U.S. Trade Deficit
Summary
The U.S. merchandise trade deficit is a part of the overall U.S. balance of
payments, a summary statement of all economic transactions between the residents
of the United States and the rest of the world, during a given period of time. Some
Members of Congress and other observers have grown concerned over the magnitude
of the growing U.S. merchandise trade deficit and the associated increase in U.S.
dollar-denominated assets owned by foreigners. This report provides an overview
of the U.S. balance of payments, an explanation of the broader role of capital flows
in the U.S. economy, an explanation of how the country finances its trade deficit or
a trade surplus, and the implications for Congress and the country of the large inflows
of capital from abroad. The major observations indicate that:
! Concerns that foreign private investors were turning away from
acquiring additional dollar-denominated assets that were prevalent
in 2004 as a result of the sharp growth in the shares of foreign
capital inflows from official sources, changed in 2005 and 2006 with
a resurgence of capital inflows from private sources.
! The inflow of capital from abroad supplements domestic sources of
capital and likely allows the United States to maintain its current
level of economic activity at interest rates that are below the level
they likely would be without the capital inflows.
! Foreign official and private acquisitions of dollar-denominated
assets likely will generate a stream of returns to overseas investors
that would have stayed in the U.S. economy and supplemented other
domestic sources of capital had the assets not been acquired by
foreign investors.
This report will be updated as events warrant.

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Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Capital Flows and the Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The U.S. Balance of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The U.S. Net International Investment Position . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
List of Figures
Figure 1. Net Inflows of Foreign Private and Official Sources of Capital . . . . . . 5
Figure 2. Foreign Official and Private Investment Positions in the
United States, 1983-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Figure 3. U.S. and Foreign Investment Position, By Major Component,
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
List of Tables
Table 1. U.S. International Transactions, Selected Accounts . . . . . . . . . . . . . . . . 3
Table 2. Summary of the Net Balances by Major Accounts in the U.S.
Balance of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 3. U.S. International Investment Position . . . . . . . . . . . . . . . . . . . . . . . . . . 8

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Financing the U.S. Trade Deficit
Background
By standard convention, the balance of payments accounts are based on a
double-entry bookkeeping system. As a result, each transaction that is entered into
the accounts as a credit must have a corresponding debit and vice versa. This means
that a surplus or deficit in one part of the accounts necessarily will be offset by a
deficit or surplus, respectively, in another account so that, overall, the accounts are
in balance. This convention also means that a deficit in one account, such as the
merchandise trade account, is not necessarily the same as a debt.1 The trade deficit
can become a debt equivalent depending on how the deficit is financed and the
expectations of those who hold the offsetting dollar-denominated U.S. assets. The
balance of payments accounts are divided into three main sections: the current
account, which includes the exports and imports of goods and services and personal
and government transfer payments; the capital account, which includes such capital
transfers as international debt forgiveness; and the financial account, which includes
official transactions in financial assets and private transactions in financial assets and
direct investment in businesses and real estate.
When the basic structure of the balance of payments was established,
merchandise trade transactions dominated the accounts. Financial transactions
recorded in the capital accounts generally reflected the payments and receipts of
funds that corresponded to the importing and exporting of goods and services. As
a result, the capital accounts generally represented “accommodating” transactions,
or financial transactions associated directly with the buying and selling of goods and
services. During this early period, exchange rates between currencies were fixed, and
private capital flows, such as foreign investment, were heavily regulated so that
nearly all international flows of funds were associated with merchandise trade
transactions and with some limited government transactions.
Since the 1970s, however, private capital flows have grown markedly as
countries have liberalized their rules governing overseas investing and as nations
have adopted a system of floating exchange rates, where the rates are set by market
forces. Floating exchange rates have spurred demand for the dollar. The dollar also
is sought for investment purposes as it has become a vehicle itself for investment and
speculation. This means that the balance of payments record not only the
accommodating flows of capital which correspond to imports and exports of goods
and services, but also autonomous flows of capital that are induced by a broad range
of economic factors that are unrelated directly to the trading of merchandise goods.
1 For additional information about the causes of the U.S. trade deficit, see CRS Report
RL31032, The U.S. Trade Deficit: Causes, Consequences, and Cures, by Craig Elwell.

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Capital Flows and the Dollar
Liberalized capital flows and floating exchange rates have greatly expanded the
amount of autonomous capital flows between countries. These capital transactions
are undertaken in response to commercial incentives or political considerations that
are independent of the overall balance of payments or of particular accounts. As a
result of these transactions, national economies have become more closely linked, the
process some refer to as “globalization.”
Another aspect of capital mobility and capital inflows is the impact such capital
flows have on the international exchange value of the dollar. Demand for U.S.
assets, such as financial securities, translates into demand for the dollar, since U.S.
securities are denominated in dollars. As demand for the dollar rises or falls
according to overall demand for dollar-denominated assets, the value of the dollar
changes. These exchange rate changes, in turn, have secondary effects on the prices
of U.S. and foreign goods, which tend to alter the U.S. trade balance. At times,
foreign governments have intervened in international capital markets to acquire the
dollar directly or to acquire Treasury securities in order to strengthen the value of the
dollar against particular currencies. In addition, various central banks moved
aggressively following the Asian financial crisis in the 1990s to bolster their holdings
of dollars in order to use the dollars to support their currencies should the need arise.
Furthermore, the dollar is heavily traded in financial markets around the globe
and, at times, plays the role of a global currency. Disruptions in this role have
important implications for the United States and for the smooth functioning of the
international financial system. This prominent role means that the exchange value
of the dollar often acts as a mechanism for transmitting economic and political news
and events across national borders. While such a role helps facilitate a broad range
of international economic and financial activities, it also means that the dollar’s
exchange value can vary greatly on a daily or weekly basis as it is buffeted by
international events. A recent survey by the world’s leading central banks indicate
that the daily trading of foreign currencies totals more than $1.9 trillion, or more than
the annual amount of U.S. exports of goods and services. The data also indicate
that 90% of the global foreign exchange turnover is in U.S. dollars, substantially the
same as the share reported in a similar survey conducted in 2001.2
The U.S. Balance of Payments
Table 1 presents a summary of the major accounts in the U.S. balance of
payments over the last seven quarters. The data indicate that in 2005 and for each
quarter in 2005 and the first three quarters of 2006 the U.S. current account, or the
balance of exports and imports of goods, services and transfers, was in deficit, or the
2 Triennial Central Bank Survey: Foreign Exchange and Derivatives Market Activity in
2004. Bank for International Settlement, March 2005. pp. 1-2. A copy of the report is
available at [http://www.bis.org/publ/rpfx05t.pdf]. The 2001 survey is: Central Bank Survey
of Foreign Exchange and Derivatives Market Activity in April 2001: Preliminary Global
Data. Bank for International Settlement, October 2001.

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United States imported more than it exported. According to the accounts, the United
States experienced a deficit in the merchandise trade goods accounts for all seven
quarters, and a surplus in the services accounts. In the income accounts, which
represent inflows of income on U.S. assets abroad relative to outflows of income
earned on U.S. assets owned by foreigners, the net balance of the accounts was in
surplus for three quarters and has been negative for the last four quarters (quarterly
data do not necessarily add up to annual amounts due to rounding).
Table 1. U.S. International Transactions, Selected Accounts
(in billions of U.S. dollars)
2005
2006
2005
I
II
III
IV
I
II
III
Current account
Balance on current account
-792
-192
-193
-183
-223
-213
-217
-226
Balance on goods and services
-717
-168
-172
-182
-195
-191
-193
-200
Balance on goods
-783
-183
-188
-199
-213
-208
-211
-219
Exports
895
214
223
225
233
245
253
262
Imports
-1,677
-397
-411
-424
-445
-452
-463
-481
Balance on services
66
15
16
17
18
17
17
18
Exports
381
92
94
96
98
100
103
104
Imports
-315
-77
-78
-79
-81
-83
-86
-86
Balance on income
11
4
2
8
-2
-3
-2
-4
Income Receipts
475
109
113
122
131
140
156
161
Income Payments
-463
-105
-111
-114
-133
-142
-158
-165
Unilateral current transfers
-86
-27
-23
-9
-26
-20
-22
-21
Capital account
Capital account transactions
-4
-3
-1
-1
-1
-2
-1
-1
Financial account
Balance on financial account
785
137
150
256
243
172
153
176
U.S.-owned assets abroad, net
-427
-87
-196
-132
-11
-356
-211
-224
U.S. official reserve assets, net
14
5
-1
5
5
1
-1
1
U.S. Government assets, net
6
3
1
2
0
1
2
0
U.S. private assets, net
-446
-95
-197
-139
-16
-358
-213
-225
Foreign-owned assets in the U.S.
1,212
224
346
389
253
527
365
400
Foreign official assets, net
199
19
75
34
72
76
76
81
Foreign private assets, net
1,013
205
272
355
181
452
289
319
Statistical discrepancy
10
58
44
-72
-19
43
65
50
Source: Weinberg, Douglas B., U.S. International Transactions: Third Quarter 2006. BEA News
Release BEA 06-56, December 18, 2006.
The data also indicate that the U.S. financial accounts were in substantial
surplus, because they represent the opposite and offsetting transactions to deficits in
the current account. Indeed, the accounting of the balance of payments is such that
the surplus in the financial accounts is equivalent to the deficit in the combined
balance in the capital account, the statistical discrepancy, and the balance on the
current account. The balance in the financial accounts represents the difference
between the capital outflows associated with U.S. investments abroad, which are
recorded as a negative value, and the capital inflows associated with foreign

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investment in the United States, which are recorded as a positive value. This
investment is a combination of both private and official investments, or investments
by private individuals and institutions and investments by governments and
governmental institutions, respectively.
The data in Table 1 also indicate that private capital flows account for the
largest share of both U.S. capital inflows and outflows. Perhaps of more importance,
however, is the data in Table 2 which show the net amount of the flows in the major
accounts, or the difference between the inflows and outflows. In 2005, for instance,
total net capital inflows representing the net balance on the current account, the
capital account, and the statistical discrepancy, were a negative $785 billion. This
deficit was financed by an offsetting net inflow in the financial account. One striking
feature of the flows is the recent change in the composition of the balances in the net
financial account. Except for 2004, total net private inflows were greater than total
net official inflows. This trend was reversed in 2004, when net official inflows were
nearly double that of the net private inflows, as indicated in Figure 1. In 2005,
private inflows were more than twice the size of official inflows and posted more
than a doubling of the amount recorded in 2004. Estimates for 2006 based on data
for the January-September period indicate that the net balance could amount to -$744
billion. Estimates for 2006 also indicate that the composition of capital inflows
shifted sharply toward official inflows, which increased by nearly 50% over the
inflows recorded for 2005, while private inflows declined by almost 25%. As a
result, private capital inflows dropped from 72% of total inflows in 2005 to 58% in
2006.
Table 2. Summary of the Net Balances by Major Accounts in the
U.S. Balance of Payments
(in billions of U.S. dollars)
1999
2000
2001
2002
2003
2004
2005
2006
Total Net Capital Inflows
$-237 $-477 $-416 $-570 $-546 $-585 $-785 $-744
Total Net Goods
-346
-452
-427
-483
-548
-665
-783
-850
Total Net Services
83
74
64
61
51
48
66
70
Total Net Income
13
21
24
7
33
30
11
-11
Total Net Transfers
-47
-56
-47
-59
-67
-81
-86
-89
Total Net Capital Account
-5
-1
-1
-1
-3
-2
-4
-4
Statistical Discrepancy
65
-63
-29
-95
-12
85
10
139
Total Net Financial Account
237
477
416
570
546
585
785
744
Total Net Official
55
42
23
111
251
399
219
314
Total Net Private
182
436
393
460
295
186
566
430
Direct Investment
65
162
25
-62
-134
-145
101
16
Portfolio Investment
138
268
295
402
292
374
523
230
Other Private (Banks)
-21
6
74
120
137
-43
-58
40
Note: Data for 2006 are estimates based on data for the nine month period January through September.
Source: Data developed by CRS from data published by the Department of Commerce.

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Figure 1. Net Inflows of Foreign Private and Official
Sources of Capital
Billions of dollars
$600
$500
Private
$400
$300
$200
$100
Official
$0
-$100
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Source: Department of Commerce
The U.S. Net International Investment Position
As indicated above, the data in Tables 1 and 2 show that the trade deficit is
accompanied by an equal capital inflow that represents an accumulation of dollar-
denominated assets by foreigners. Some observers have equated the trade deficit and
the associated accumulation of foreign-owned dollar-denominated assets as a debt
that the U.S. economy owes to foreigners that will have to be repaid. This
characterization, however, is not entirely appropriate. The debts owned by foreign
investors represents claims on assets, rather than loans where payments on the
principle and interest are specified according to a fixed schedule and where failure
to meet the repayment schedule can result in the loans being called in and made
payable in full. While foreign investors have expectations of a positive return on
their dollar-denominated assets, returns, except for Treasury securities, are not
guaranteed, but are subject to market forces. An important feature of claims by
foreign investors on U.S. assets is that some or all of the profits or returns on the
assets can be repatriated to the home country of the foreign investor, thereby reducing
the returns that would otherwise remain in the U.S. economy.
According to the most commonly accepted approach to the balance of payments,
macroeconomic developments in the U.S. economy are the major driving forces
behind the magnitudes of capital flows, because the macroeconomic factors
determine the overall demand for and supply of capital in the economy. Economists
generally conclude that the rise in capital inflows can be attributed to comparatively
favorable returns on investments in the United States when adjusted for risk, a
surplus of saving in other areas of the world, the well-developed U.S. financial
system, and the overall stability of the U.S. economy. In turn, these net capital
inflows (inflows net of outflows) bridge the gap in the United States between the
amount of credit demanded and the domestic supply of funds, likely keeping U.S.

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interest rates below the level they would have reached without the foreign capital.
These capital inflows also allow the United States to spend beyond its means,
including financing its trade deficit, because foreigners are willing to lend to the
United States in the form of exchanging goods, represented by U.S. imports, for such
U.S. assets as stocks, bonds, U.S. Treasury securities, and real estate and U.S.
businesses.
While this exchange of assets is implicit in the balance of payments, the
Department of Commerce explicitly accounts for this broad flow of dollar-
denominated assets through the nation’s net international investment position. The
U.S. net international investment position represents the accumulated value of U.S.-
owned assets abroad and foreign-owned assets in the United States measured on an
annual basis at the end of the calendar year. Some observers refer to the net of this
investment position (or the difference between the value of U.S.-owned assets abroad
and the value of foreign-owned assets in the United States) as a debt, or indicate that
the United States is a net debtor nation, because the value of foreign-owned assets
in the United States is greater than the value of U.S.-owned assets abroad.
In fact, the nation’s net international investment position is not a measure of the
nation’s indebtedness similar to the debt borrowed by some developing countries, but
it is simply an accounting of assets. By year-end 2005, the latest year for which data
are available, the overseas assets of U.S. residents totaled approximately $9.6 trillion,
while foreigners had acquired about $12.5 trillion in assets in the United States, with
direct investment measured at historical cost. As a result, the U.S. net international
investment position was about a negative $2.8 trillion, as indicated in Table 3.
Foreign investors who acquire U.S. assets do so at their own risk and accept the
returns accordingly, unlike the debt owed by developing countries where principle
and debt service payments are guaranteed in advance. While foreign investors likely
expect positive returns from their dollar-denominated assets, the returns on most of
the assets in the international investment position, except for bonds, are not
guaranteed and foreign investors stand to gain or lose on them similar to the way U.S.
domestic investors gain or lose.
As Table 3 indicates, the investments in the international investment position
include such financial assets as corporate stocks and bonds, government securities,
and direct investment3 in businesses and real estate. The value of these assets,
measured on an annual basis, can change as a result of purchases and sales of new or
existing assets; changes in the financial value of the assets that arise through
appreciation, depreciation, or inflation; changes in the market values of stocks and
3 The United States defines foreign direct investment as the ownership or control, directly
or indirectly, by one foreign person (individual, branch, partnership, association,
government, etc.) of 10% or more of the voting securities of an incorporated U.S. business
enterprise or an equivalent interest in an unincorporated U.S. business enterprise. 15 CFR
§ 806.15 (a)(1). Similarly, the United States defines direct investment abroad as the
ownership or control, directly or indirectly, by one person (individual, branch, partnership,
association, government, etc.) of 10% or more of the voting securities of an incorporated
business enterprise or an equivalent interest in an unincorporated business enterprise. 15
CFR § 806.15 (a)(1).

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bonds; or changes in the value of currencies. The Department of Commerce also
uses three different methods for valuing direct investments that yield roughly
comparable estimates for the net position, although the three methods do provide
estimates on U.S. direct investment abroad and foreign direct investment that can be
considerably different at times.4
The foreign investment position in the United States continues to increase as
foreigners acquire additional U.S. assets and as the value of existing assets
appreciates. These assets are broadly divided into official and private investments
reflecting transactions by governments among themselves and transactions among
the public. While the foreign official share of the overall amount of capital inflows
has grown sharply as indicated in Table 2, the overall foreign official share of
foreign-owned assets in the United States has remained relatively modest.
As Figure 2 indicates, official asset holdings were valued at slightly more than
$2 trillion in 2005, or about 16% of the total foreign investment position, a share that
has remained relatively stable over the 13-year period of 1993 to 2005. Official
assets include such monetary reserve assets as gold, the reserve position with the
International Monetary Fund (IMF), and holdings of foreign currency. An important
component of foreign official holdings in the United States is the acquisitions of U.S.
Treasury securities by foreign governments. At times, such acquisitions are used by
foreign governments, either through coordinated actions or by themselves, to affect
the foreign exchange price of the dollar. Foreign currency holdings account for a
relatively small share of the total foreign investment position.5
4 For additional information, see CRS Report RL32964, The United States as a Net Debtor
Nation: Overview of the Net International Investment Position, by James K. Jackson
5 For additional information, see CRS Report RL32462, Foreign Investment in U.S.
Securities, by James K. Jackson.

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Table 3. U.S. International Investment Position
(in millions of dollars)
Type of Investment
2002
2003
2004
2005
Net international investment position of the United States:
With direct investment at current cost
(2,088,008)
(2,131,170) (2,360,785) (2,693,799)
With direct investment at market value
(2,454,328)
(2,338,788) (2,448,744) (2,546,175)
With direct investment at historical cost
(2,183,248)
(2,232,818) (2,502,472) (2,838,777)
U.S.-owned assets abroad:
With direct investment at current cost
6,652,248
7,648,880
9,186,661 10,008,676
With direct investment at market value
6,807,793
8,318,156 10,075,337 11,079,202
With direct investment at historical cost
6,401,753
7,380,921
8,838,641
9,624,726
U.S. official reserve assets
158,602
183,577
189,591
188,043
U.S. government assets, other
85,309
84,772
83,062
77,523
U.S. private assets:
With direct investment at current cost
6,408,337
7,380,531
8,914,008
9,743,110
With direct investment at market value
6,563,882
8,049,807
9,802,684 10,813,636
With direct investment at historical cost
6,157,842
7,112,572
8,565,988
9,358,160
Direct investment abroad:
At current cost
1,867,043
2,059,850
2,399,224
2,453,933
At market value
2,022,588
2,729,126
3,287,900
3,524,459
At historical cost
1,616,548
1,791,891
2,051,204
2,069,983
Foreign securities
2,079,891
2,953,778
3,553,387
4,073,997
Bonds
705,226
874,356
992,969
987,543
Corporate stocks
1,374,665
2,079,422
2,560,418
3,086,454
U.S. claims by U.S. nonbanking concerns
901,946
594,004
733,538
784,521
U.S. claims reported by U.S. banks
1,559,457
1,772,899
2,227,859
2,430,659
Foreign-owned assets in the United States:
With direct investment at current cost
8,740,256
9,780,050 11,547,446 12,702,475
With direct investment at market value
9,262,121
10,657,944 12,524,081 13,625,377
With direct investment at historical cost
8,585,001
9,613,739 11,341,113 12,463,503
Foreign official assets in the United States
1,250,977
1,562,770
2,001,407
2,216,123
Foreign private assets:
With direct investment at current cost
7,489,279
8,217,280
9,546,039 10,486,352
With direct investment at market value
8,011,144
9,095,174 10,522,674 11,409,254
With direct investment at historical cost
7,334,024
8,050,969
9,339,706 10,247,380
Direct investment in the United States:
At current cost
1,499,952
1,576,963
1,727,062
1,874,263
At market value
2,021,817
2,454,877
2,703,697
2,797,165
At historical cost
1,344,697
1,410,672
1,520,729
1,635,291
U.S. Treasury securities
473,503
527,223
562,288
704,875
U.S. other securities
2,779,067
3,422,856
3,995,506
4,390,682
Corporate and other bonds
1,530,982
1,710,787
2,035,149
2,275,197
Corporate stocks
1,248,085
1,712,069
1,960,357
2,115,485
U.S. currency
301,268
317,908
332,735
352,151
U.S. liabilities by U.S. nonbanking concerns
897,335
450,884
507,668
563,749
U.S. liabilities reported by U.S. banks
1,538,154
1,921,426
2,420,780
2,600,632
Source: Nguyen, Elena L., The International Investment Position of the United States at Yearend
2005, Survey of Current Business, July 2006. p. 19.

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Figure 2. Foreign Official and Private Investment Positions in
the United States, 1983-2005
Trillions of dollars
$12
$10
$8
$6
$4
$2
$0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Foreign official assets
Foreign private assets
Source: Department of Commerce
Private asset holdings are comprised primarily of direct investment in businesses
and real estate, purchases of publicly traded government securities, and corporate
stocks and bonds. As indicated in Figure 3, the composition of U.S. assets abroad
and foreign-owned assets in the United States differ in a number of ways. The
strength and uniqueness of the U.S. Treasury securities markets make these assets
sought after by both official and private foreign investors, whereas U.S. investors
hold few foreign government securities. As a result, foreign official assets in the
United States far outweigh U.S. official assets abroad. Both foreign private and
official investors have been drawn at times to U.S. government securities as a safe
haven investment during troubled or unsettled economic conditions.

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Figure 3. U.S. and Foreign Investment Position, By Major
Component, 2005
US Assets
Foreign Assets
Total = $9.6 trillion
Total = $12.5 trillion
Official assets
Direct invest.
Govt. securities
Bonds
Stocks
Nonbanks
US banks
$3
$2
$1
$0
$1
$2
$3
Trillions
Trillions
Source: Department of Commerce
Implications
The persistent U.S. trade deficit raises concerns in Congress and elsewhere
because of the potential risks such deficits may pose for the long term rate of growth
for the economy. In particular, some observers are concerned that foreigners will
become saturated with dollar-denominated assets and will become unwilling to
accommodate the trade deficit by holding more dollar-denominated assets. The shift
in 2004 in the balance of payments toward a larger share of assets being acquired by
official sources generated speculation that foreign private investors had indeed
reached the point where they were no longer willing to add more dollar-denominated
assets to their portfolios. This shift was reversed in 2005, however, as foreign
private investments rebounded.
Another concern is with the outflow of profits that arise from the dollar-
denominated assets owned by foreign investors. This outflow arises from the profits
or interest generated by the assets and represent a clear outflow of capital from the
economy that otherwise would not arise if the assets were owned by U.S. investors.
These capital outflows represent the most tangible cost to the economy of the present
mix of economic policies in which foreign capital inflows are needed to fill the gap
between the demand for capital in the economy and the domestic supply of capital.
Indeed, as the data presented indicate, it is important to consider the underlying
cause of the trade deficit. According to the most commonly accepted economic

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approach, in a world with floating exchange rates and the free flow of large amounts
dollars in the world economy and international access to dollar-denominated assets,
macroeconomic developments, particularly the demand for and supply of credit in the
economy, are the driving forces behind the movements in the dollar’s international
exchange rate and, therefore, the price of exports and imports in the economy. As
a result, according to this approach, the trade deficit is a reflection of macroeconomic
conditions within the domestic economy and an attempt to address the issue of the
trade deficit without addressing the underlying macroeconomic factors in the
economy likely would prove to be of limited effectiveness.
In addition, the nation’s net international investment position indicates that the
largest share of U.S. assets owned by foreigners is held by private investors who
acquired the assets for any number of reasons. As a result, the United States is not
in debt to foreign investors or to foreign governments similar to some developing
countries that run into balance of payments problems, because the United States has
not borrowed to finance its trade deficit. Instead the United States has traded assets
with foreign investors who are prepared to gain or lose on their investments in the
same way private U.S. investors can gain or lose. It is certainly possible that foreign
investors, whether they are private or official, could eventually decide to limit their
continued acquisition of dollar-denominated assets or even reduce the size of their
holdings, but there is no firm evidence that such presently is the case.
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